Federal Signal Corp (FSS) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter earnings release conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded. I would now like to turn the presentation over to your host, Ms. Stephanie Kushner, Financial Officer, and Mr. Robert Welding, Chief Executive Officer. Ms. Kushner, you may begin.

Good morning and welcome. As usual, I will start the call by reminding you that some of our comments contain forward-looking statements about the future prospects of Federal Signal. But please refer to our latest Annual Report to shareholders, our recent SEC filings and the press release that we issued in conjunction with this conference call for a more detailed discussion of the risks that are involved in our forward-looking statements. The press release, if you haven't got it, is available on our website under federalsignal.com. I will turn it over to Bob for his initial comments.

Thanks, Stephanie, and good morning, everyone. I'd like to welcome you to our third-quarter conference call as well. We have a lot of ground to cover this morning, as you have seen from the sheer length of our press release. Obviously we're not thrilled to have to explain a loss for the quarter. But on the other hand, we have a lot going on, so it's good to have the opportunity to update you on the progress of our transformation and provide you with a view about what lies ahead. I will begin by commenting on market conditions in our broad markets, give you an update on our restructuring efforts, and then get into details of each of our 4 business groups.

Federal Signal businesses serve 3 broad markets -- domestic municipal and government customers, domestic industrial commercial customers, and non-US customers.

Overall we saw mixed results in our municipal and government business for the quarter. Third-quarter orders girders for our environmental products and warning systems were dramatically higher than last year; up more than 40 percent. Police lights and sirens were slightly down from 2003, but some of this involved delivery timing of new police cars, which we believe will be short-term in nature. Our only disappointment was in fire rescue orders where new business was weak in August and September. Due to their untiring focus on responding to the public's needs following the hurricanes in the far Southeastern states, which is our strongest region, fire departments in that area essentially stopped working on apparatus order activity. That activity looks to be back on track now in October, so we expect a gradual recovery over the next couple quarters. But throughout the rest of the country we saw a general slowdown in finalizing expected orders for fire apparatus. We had a strong first half for new business. And with October getting off to good start, our backlog remains strong.

Although we don't know for certain because industry sales data is still not available from FAMA beyond the fourth quarter of last year, we do not expect we lost any unexpected market share. Recall that in June, when we announced the closing of our Preble, New York manufacturing facility, we indicated we would be deliberately restricting orders for stainless-steel trucks for an interim period. We expect to give up about 1 point of share while we are relocating and stabilizing production of those models into our Ocala, Florida plant. We will be expanding production on stainless-steel models again as we enter 2006, and we fully expect to regain the lost share and grow beyond that in the ensuing years. But I have to say that the possibility exists that we experienced some slippage beyond this as our dealers and sales force were distracted because of the series of management changes. However, everyone is refocus again, and we have a strong backlog, so this should not affect us going forward.

Moving on to industrial commercial, even after stripping out the large contract received for parking systems for the New York and New Jersey Port Authority, our new business bookings were up nicely. Safety products businesses saw moderate to strong gains across the board. This, coupled with a very strong increase at tool, more than offset declines in industrial vacuums and refuse truck bodies. The refuse decline is due exclusively to the loss of share of 1 large commercial hauler, as reported about a year ago. Although we had a nice quarter for new business bookings, we are seeing growth rates in the industrial commercial markets leveling off somewhat, so we will be watching this carefully in the coming months.

Continuing a trend underway for sometime now, our new business from non-US customers was strong again, up 14 percent in the quarter. In particular, we continue to experience strong orders for our environmental products equipment from the Middle East, including an Iraqi order for a number of Vactor sewer cleaning trucks.

Continuing with comments on the overall market conditions, I'd like to discuss for a minute a major factor impacting our overall earnings this quarter, that being commodity price increases. In last quarter's conference call we predicted purchased materials would cost us about $10 million more than planned for the year, and we would be able to recover only about 6.5 to 7 million of that during the year. However, steel prices have continued to trend up since that time, and this continues to impact many more purchased components. Although we have chased these increases with price increases to our customers, we're suffering from the lag for our longer-lead-time vehicle products. Our updated protection is an impact of $15 million for the full-year with 8 million unrecovered or an impact of about 11 cents a share for the year. For the third quarter alone the unrecovered portion was about $3.5 million or 5 cents a share, and all of this is in refuse and fire and rescue business.

Our inability to forecast the extent of these increases and pro-actively take sufficient mitigating action has been 1 of the most frustrating issues that I've faced in the last several months. This is simply not acceptable performance and has helped to precipitate a new focus and some management changes in both businesses that were affected.

Before we jump to the business groups, I'd like to provide a brief update on the restructuring plan announced at that end of June, as well help frame the discussion for our third-quarter results in each business segment. At the time we disclosed 7 transactions. 3 of them are still in process, namely the closure of our fire rescue plant in Preble, New York, the closure of manufacturing operations at a Tool Group plant in France, and the closure of our refuse plant and Oshkosh, Wisconsin. I will speak more about these in a few minutes. The other 4 transactions have been completed.

Now let's move on to the results of our business groups, starting with the easier ones.

Our Tool Group continues a very strong year with revenues up in each of the business segments. Operating margins are improved before the impact of restructuring and the impact of an ERP implementation glitch at 1 of our operations that hit in August.

In regard to the ERP implementation, our people had been working diligently. And as of September most of the issues have been fixed, so we don't expect this to be a material issue going forward.

The exception to the good news in Tool during the year had previously been weakness in Europe. But we did see some pick up in Q3 that we think will carry over into Q4. Progress in shutting down manufacturing operations in France and moving production to our new plant in Portugal is on track, with the bulk of the reductions to be implemented by the end of the year, plus some newly identified reductions occurring in the first half of 2005. The Tool Group has managed commodity price increases very effectively and will achieve a small earnings benefit resulting from its costs and pricing management.

Our Safety Products Group also continues to perform nicely. As you know, we've been struggling all year with a number of issues in our parking business, but we're starting to get our arms around that now. The big news during the quarter was the Group's receipt of the $47 million contract for parking systems for the 3 airports under the Port Authority of New York and New Jersey jurisdiction. We're delighted with this award, which is an indication of the competitive advantage we have derived as a result of our sizable investment in R&D for the DFW project. We expect this airport business to grow significantly in the future. But as you can see, new awards come in big lumps and the timing of them typically is difficult to predict, so this will be 1 of our forecasting challenges going forward.

Parking performance to date has been impacted significantly as new business in our base domestic sector has been weak all year due to project delays. However, the spigot opened a little more in this category in Q3, giving us a glimmer of hope hope that we've seen the bottom, which would bode well for the coming quarters. The small project business has better margins than the large project category, so this would be a welcome recovery.

Installation of our DFW airport system has been delayed due to some software issues. We've augmented the team with additional resources and a heavier project manager a few weeks ago, and have made enormous progress since. We expect installation to begin in the current quarter.

Safety Products management has also done a great job in mitigating the impact of commodity price increases through offsetting pricing action, and the margins for the Group remained strong.

Let's move on to Environmental Products or our Jekyll and Hyde business. The Group's performance in the quarter was outstanding except for refuse, which, as expected, continues to lose money at a considerable rate. More about that in a minute. But first I'd like to complement our people in the other businesses in the group that have been growing margins in spite of significant steel cost increases and other commodity inflation. Our backlog is strong, new business is strong, so we expect continuing great performance in the months ahead from these businesses.

In regard to refuse, we're moving aggressively on this component of our restructuring plan to consolidate production into our Medicine Hat, Alberta plant. A couple of weeks ago we completed discussions with the UAW, as expected, in regard to the closing of the Oshkosh, Wisconsin facility, so we're now able to move forward. We will still meet our targeted completion date at that end of Q1 2005.

Our issues in refuse are threefold. First, as a result of general industry weakness and the loss of a substantial portion of business with waste management, as discussed previously, our total volumes about half of what the 2 businesses were doing prior to acquisition.

Second, steel cost historically runs between 10 and 15 percent of sales price for the various truck bodies in refuse. As steel prices have more than doubled since the beginning of the year, the profit impact has been severe. Lead-times run between 4 and 5 months, so the effect of any offsetting pricing action is delayed by at least that amount of time. Unfortunately, our agreements with our steel suppliers were not effective in holding back their increases to us with immediate effect, and our dealer agreements preclude us from repricing the backlog so we're stuck in the middle. Our existing backlog is still priced short of full recovery, but we should have those worked through the system by about the end of January.

A third major problem that impacted the quarter in refuse was the realization that a field fix applied to units with extended warranties at 1 of our large commercial customers was not effective. The re-designed seal from the supplier did not fix the problem, and we're going to have to go out again with another fix that we believe will take care of it. Recoveries from our supplier only partially recovered this cost. We reserved an additional $1.2 million in the quarter to cover this. The bulk of these units were built pre-acquisition. While we knew about the problem with leaking hydraulic cylinders and created a reserve for repairs on opening balance sheet, the final cost will exceed the initial estimates.

We are confident that the long-term outlook for this business is promising. We expect significant improvements in a couple of areas over the next several months. The full-year benefit of consolidating the 2 plants is about $8 million a year, and we will soon have the commodity cost inflation offset in our prices. In addition, we have a number of initiatives underway to reduce direct costs, including reconfiguring our assembly lines for improved throughput and efficiency, taking cost out with some design modifications, and striking a more cost-effective and EZ-effective (ph) portfolio of out-sourced and in-sourced components. We are being aided in this work by a consulting company with operations expertise. We're pushing hard to achieve profitability in 2005. But we're not there yet with our identified initiatives.

Looking forward to next year, indications are that the municipal side of the market for refuse is on the recovery path. And we think the commercial accounts will pick up in 2005 as they finally get back into the process of replacing some of their tired trucks. We expect to gain share in both of these segments as they recover.

Now let's move on to Fire Rescue. We've been plagued by uncertainties and surprises in this business for some time. The disruptions of production and the resulting unreliability of earnings at FRG remains the only significant obstacle that prevents us from being able to provide meaningful earnings guidance to our investors. Stabilizing the erratic production flow in Ocala is essential to getting our arms around the most reoccurring part of the problem. And as I will share with you in a minute, we made good progress in that area last quarter. Production cost overruns and warranty issues are longer-term problems. We're working hard on improving our understanding of these issues, and trying to paint them into corners so we can better manage them.

Hurricanes, of course, are not predictable. Nor are they expected in the north central part of Florida. E-ONE has operated there since its beginning in 1974 and no one recalls ever losing production because of 1, but this year we battened down for 3 of them. This cost us about $2 million overall with about 800,000 yet to impact the fourth quarter financials.

Material cost increases have also impacted FRG significantly during the quarter. We implemented price increases in early June, but most everything in our backlog to be shipped during the remainder of the year is still at the old prices. We have the same problems with our dealer agreements as we do in refuse in that we're precluded from repricing the backlog, leaving us in the middle of holding the bag to the tune of about $2.5 million for the quarter for FRG alone. Old-priced tucks won't be completely washed through until sometime in the second quarter of 2005.

Compared to Q3 last year, our income at FRG was off by $5.7 million. As I have said, 2.5 million was material costs. Lower volume hit us by about 1.2 million. 700,000 was due to reduced profitability on the Royal Netherlands contract. And increased warranty costs hit us to the tune of about 700,000. Finally, a worse mix and all other issues made up the remaining 600,000.

This performance is bad enough, but a significant personal disappointment was our failure to reduce the buildup of working capital at Ocala in Q3 which happened right under my nose. I assure you this process is now underway with a vengeance, and we will have most of it worked off by the end of the year.

Despite this difficult environment, we have made significant progress in turning this ship around. First of all, I'm delighted that we filled the group president position with an outstanding executive, Marc Gustafson, with great experience in heavy truck industry, as well as the fire apparatus industry. With Marc in place now for 3 weeks, we're working diligently on filling other key leadership positions in manufacturing and sales and marketing. 1 new team member started yesterday. Larry Moore (ph) joined FRG as Vice President, Purchasing and Materials, shoring up a weak area with a very seasoned professional experienced in the heavy truck and fire apparatus industries. Mark has his hands full for the next few months, but he's a solid leader with a wealth of experience in turnaround situations. Our dealer group is very pleased with the changes that have been happening and our once again very enthusiastic about the future.

I spent 3 months in Ocala during the recruiting process, and this turned out to have some benefits even beyond my expectations. Having that amount of time to soak in the business, learn the very special characteristics of the fire apparatus industry, and do a deep dive on the issues have helped me to make sure that Marc is the right guy and to help the organization get more focused on the most critical issues.

As I have described in our past conference calls, getting the production operation stabilized and predictable and getting the front end of the business structured are the keys to returning this business to acceptable profitability. I'm very pleased with the progress our employees made in stabilizing production flow during my time there, in spite of our momentum being interrupted 3 times as we've had to close down for the storms. We have focused on identifying the root causes of production disruptions and work to kill the most pervasive ones 1 by 1 with formal problem resolution teams.

The outcome of my deep dive into the Ocala issues resulted in another outcome. We decided to make a change in our selling terms to our dealers. This change will in turn drive a change to our point of revenue recognition for sales made to them. Currently under the terms of our contract we sell and transfer risk to our dealers FOB completion of the truck at our plant. These terms, as I have come to learn, have had the unfortunate consequence of focusing the entire organization on achieving technical completion to achieve delivery under the terms. It is not uncommon for end customers to request changes the completed vehicles before actual shipment from the factory. When this occurs traceability of those changes and the related costs are difficult to administer, to analyze, and to recoup. I believe this causes some of our production inefficiencies, and furthermore could be negatively impacting of warranty costs.

In the fourth quarter we will change the terms of our dealer agreements so that trucks are not invoiced and risk is not transferred until the trucks physically leave the site. Although this change will reduce Q4 earnings by approximately $1 million, we believe it will in the long-term improve our production flow, our profitability and our customer satisfaction. It's another step in our get-well plan.

So we're making progress and we will continue getting better day by day, although we won't be able to make the great leap forward until we have the product structured and fully defined, which continues to be the focus of our configurator implementation team.

We've named our new configurator tool EZ-ONE (ph), a clever name that is both descriptive of 1 of its characteristics and a play on our E-ONE brand name. After much beta testing and with considerable input from our dealers to make it as easy and as functional as possible, EZ-ONE was rolled out to our dealers last week for 2 of our major product lines. The implementation team has targeted coverage of about 55 percent of our products by the end of January and 80 percent by the end of next year. Keep in mind lead-times in this industry are about between 9 and 12 months, so we will take some time to realize the full benefit of this on our operations. But over the next 3 years this will help us reduce lead-times, improve quality and reduce costs considerably. But until it's fully implemented we still have to very manually scrub orders, scrub bills and materials, inventory lists, shop orders, and continue to respond to unforeseen issues in the plant floor as they arise and interrupted a smooth production flow.

Now looking forward, for Q4 we expect FRG to be profitable, barring any other significant surprises or natural disasters. In 2005, we have the lift of the price increases going for us, the fixed cost reduction of the closure of Preble, and smoothing production flow. We're shoring up our sales force in a couple of critical product areas. And with the reinvigorated dealer group I'm confident we will be gaining traction quarter-by-quarter as we go forward.

Finally, a few words about guidance. We cannot yet frame our future performance within a band that is useful to anyone. What we can say is that short of any significant surprise we will be profitable in Q4 and will be improving profitability as we move through 2005. We have a lot of specific improvements hitting in Q1 and Q2 as we realize the benefits of our plant consolidations and price increases on our long-lead (ph) trucks. At this time it appears as though steel price increases have leveled off and we're actually seeing some very early signs of easing. So while being cautiously optimistic, I will remind you we were fooled by this in June and July, so I can't be fully confident that we have seen the end of the problem.

We hope we would be in a position by the end of the year to begin giving specific guidance for 2005. We're not there yet. And I do realize the problem that this causes as you try to evaluate our Company. In addition to stabilizing operational problems, we have a lot of changes underway that are changing our footprint, our focus, and our cost structure. We still have a few divestitures to go to complete the outline of our Phase I restructuring.

Looking forward, we're improving our market intelligence, processes, our advanced product planning, and our new product development. We're implementing shared services for some back-room operations. We're working on 3 projects in China. And we're on the lookout for bolt-on strategic acquisitions. We're rolling out our economic value measurement system with variable compensation based exclusively on EZ (ph) next year. So there's a lot going on that's helping us to position the Company for profitable growth in the future.

We will schedule a conference call for mid-December to discuss our view of 2005 and the future. We're just now receiving the annual and 5-year business plans from all of our business units, and we will have thorough reviews throughout the month of November. So we will soon have a much better perspective on how we will look post-restructuring.

Now I will turn it over to Stephanie.

Good morning. First, let me talk about the charges for restructuring.

During the quarter we incurred $3 million of restructuring costs associated with the 3 plant closures that are underway. This brings the total restructuring incurred to date to $11.1 million pre-tax or $7.4 million, 15 cents per share, after-tax. Back in June we had projected total after-tax restructuring charge of $12.6 million, so we have incurred about 60 percent of the total at this point. The balance will mainly be incurred in the fourth quarter of this year and in the first quarter of 2005 when we complete the transfer of our refuse truck body production to Medicine Hat, Alberta from Oshkosh, Wisconsin.

We also recorded a $1.4 million charge in discontinued operations. We increased the tax reserve associated with the divestiture earlier this year of our interest in Plastisol. And we also recognized a loss on a contingent liability associated with the divestiture of the sign business last year. The net effect of these charges was to reduce third-quarter operating earnings by 4 cents a share and lower net income including discontinued operations by 7 cents per share.

The Corporation had a strong order quarter, and backlog increased 10 percent during the quarter. At the end of the quarter our backlog by group was for EPG, $92 million, up 11 percent; for Fire Rescue, $257 million, down 5 percent; for Safety Products, $83 million, more than double because of the large New York/New Jersey award; and Tool, $10 million; for a total backlog of $443 million, which is up 10 percent. The current backlog is actually a 25 percent from this time last year.

The foreign currency effects year-over-year were slightly negative. Our sales of $281 million benefited about 1.4 percent or $4 million from the stronger European and Canadian currencies. The net effect on operating income was negative due to increased production costs in Canada for our refuse business which sells and ships most of its production in US dollars. The net adverse effect was about 2 cents per share in the quarter.

Our gross profit margin averaged 21.6 percent, down from 27.1 percent in the same quarter of last year. The decline was really spread among 3 businesses -- the weak operating results from Ocala and for our refuse business, and then the timing of shipments from Bronto in Finland. We believe that will correct itself in the fourth quarter.

Selling, general and administration expenses as a percent of sales averaged 20.4 percent, which is an improvement from the 21.2 percent in last year's third quarter due to some staffing reductions which were implemented during 2003, partly offset by the higher audit expenses in the corporate office. The corporate expense portion of SG&A was $5.2 million, up from 2.9 million last year. The 2003 figure included a cumulative favorable adjustment to the bonus accrual given the weak financial performance. In the current year quarter expenses were higher for recruiting and relocation, internal and external audit expenses associated with the Sarbanes-Oxley Section 404 implementation. And also, we are experiencing some higher staffing expenses associated with the centralization of our human resources and information technology departments.

Our reported effective tax rate was 42 percent in the quarter, which is higher than normal, as we adjusted our full-year tax rate consistent with our latest outlook.

I will now make a few comments on the balance sheet.

Our operating cash flow recovered somewhat in the quarter to $10 million and is now $1.5 million for the 9 months. This includes $2.2 million of cash outlays associated with our announced restructuring activities. The adverse working capital trend improved slightly, so the use of funds for working capital and other is now $19.3 million year-to-date.

As Bob commented, inventories at Fire Rescue remain well ahead of a year ago. The increase is spread across 3 operations – Bronto in Finland, due to the timing of the shipments and a change in the work flow associated with 1 of their product lines; about $10 million in Europe as we complete and deliver this year the final units associated with the Royal Netherlands Air Force order; and Ocala, due to operating difficulties. We expect significant reduction in all of these balances between now and year end. The Bronto inventories will decline as we ship the all-around (ph) units to Europe. PN (ph) balances are currently declining as we deliver these units. And Ocala's management team is focused on making significant reductions in Florida before year end.

Our receivables net of customer deposits are up very slightly from the end of last year, and amounted to 50 days in September versus 49 in December of last year.

Our capital spending was $4 million in the quarter, which brings spending for the 9 months to $15.3 million. Our full-year capital spending estimate has been reduced to $20 million as spending has been running less than planned while everyone is focused on restructuring activities.

At quarter end, the ratio of manufacturing debt to capitalization was 44 percent with manufacturing debt slightly lower at $290 million versus 292 at June 30th. Based on planned working capital reductions, that figure should decline to about 40 percent at year end.

Regarding liquidity, at quarter end we had only $78 million drawn against our $200 million committed revolving credit facility. Prior to quarter end, due to the projected weak operating results we asked the banks in this facility to waive compliance for the quarter with the interest coverage test. All the banks approved our request, and we were in compliance with the agreement at the end of the quarter.

I will turn it back over to Bob to conclude and moderate questions.

There's no question that our results this quarter and this year are just absolutely disappointing. But I will remind you that we really only have 2 major problems that are tainting an otherwise very good performance. I'm not minimizing the extent of the issues that these 2 are causing, but we are able to get extraordinary attention focused on these to get them back on track. And we will update you on our progress in December. And in the meantime we will take your questions.

(OPERATOR INSTRUCTIONS) Walt Liptak, KeyBank Capital Markets.

Good morning. The question I've got is in the Fire Rescue Group. You mentioned that orders were down. Would you mind talking about how much orders were down, and maybe some of the -- I know you went into a couple of the issues, but some of the things that may be impacting the dealer network or municipal markets?

In the quarter our orders were down 19 percent for Fire Rescue. (multiple speakers) comment on the --

The only thing that I can say, Walter, is in the Southeast US, which is 1 of our strongest regions, orders in August just essentially died. And September we didn't hardly see anything either. And now that's coming back in October.

Throughout the rest of the country the only thing that we can say is that the deals that we normally or would have expected to have been finalized during those months didn't get finalized. This is something in this business that we run into because of the way municipal budgeting and approvals are done. But with dealers in all of these areas, we know the business that's being let. We keep our eyes on it. We work hard on it. So we're not aware of, other than in a couple of specific instances where we actually lost some business that we thought we would get. Everything we can tell is just delayed decisions.

So the expectation would clearly be that in the fourth quarter we see orders start to recover as the hurricane issue is --?

Yes, our October, we are doing better than planned. So I hope that that's an indication that for the rest of the quarter that things will hold up similar to that. Usually the fourth quarter is a very strong month for fire anyhow as municipal budgets come up against their fiscal deadline. So we would -- but we have anticipated that in our forecast, and we're doing actually a little bit better than that.

For truck parts in general we're hearing about some parts in short supply -- engines and transmissions and things; companies going on allocation. Are you seeing any kind of an impact or concern over parts shortages yet?

No, not directly. We've been watching this for most of the year. In fact, part of the reason for the inventory buildup at Ocala was that we decided to bring in more commercial chassis than what we would normally have just to give ourselves a little bit of a buffer. We did have some axle problems a few months ago that slowed us down. We did have some auxiliary engine problems a few months ago in our EPG side that caused us to delay a few builds. But so far it really hasn't cost us anything. And as we sit here today, things seem to be in better shape than they were just 2 or 3 months ago in regard at least to the things that we're hearing from our suppliers.

You mentioned -- and skipping to the Tool Group, you mentioned that there were some costs associated with the software problem, the ERP problem.

Yes.

Can you quantify that?

It's about $400,000. It mainly manifested itself in heavy overtime and expediting costs because meeting delivery requirements is very important for us in that business. So we needed to do what it took to make sure that we stayed on top of our delivery schedule.

Okay, good. Okay, I'll get back in queue.

(OPERATOR INSTRUCTIONS) Kent Hortensen (ph), Thrivant Investment Management (ph).

I didn't quite catch it -- you were talking about the configurator, and I thought I remember you saying that it would be 55 percent complete in January. But I didn't hear the third number.

80 percent by the end of next year, end of 2005.

Why the big gap between January and December? Why does it kind of take so long to get that incremental 30 percent?

What we've done is we have started on the easiest ones on our simpler models with fewer options. So as we go through time it gets more difficult and takes more time because there's a lot more structure that needs to be put into this and rules written regarding what options are allowed with certain things and not with other things. So it just gets a lot more complicated to create the structure for the models as we go forward.

So those percentages are number of models. Is that correct?

You can look at them 1 of 2 ways, and the number comes out not that much different. But the 55 percent is relative to the revenue -- so the trucks that constitute about 55 percent of our revenue. And it's about, as I recall, 40 percent of our volume or something. No, it has to be less than that. But at any rate, the 80 percent by the end of next year, as it works out that works both for the revenue and for the number of units.

You have mentioned in the refuse business that -- you had walked through a number of items that you identified would reduce costs there. But you made kind of a closing comment there that you hadn't yet identified enough savings to get you to break-even. Did I interpret that correctly?

That's correct.

So how far away are you from that gap right now? What are some of the things you're looking at that close that gap?

I would have to say that there's still a sizable gap. Now, the biggest problem is the lack of volume. As I said, our volume is about half of what these 2 businesses did combined before. Next year we do expect a pretty significant increase in volume as we go through the year. But the gap, we're working on initiatives that would close this gap even under the kind of volume scenario that we see for next year. Obviously if it's a little bit better than that, then that gap closes much easier. But it's really going to have to be in cost reduction.

We do have some exercises underway to take some design costs out of it. We're still looking at our overhead structure for this business. We have substantially reduced the overhead structure when we combined the 2 businesses. But if it's going to run at this rate, then there's still some things that we have to do. Our guys are there right now today, for the next couple of days again, to put together the results of the things that they've been working on over the last couple of weeks. But we're going to keep working at this. The changes that we will have to do beyond now won't be real easy and real quick, but we're going to do whatever we have to do to make sure that this business doesn't continue to drag on our performance.

So I suspect that we will probably talk more about that December?

Yes, we will have more to say about this in December.

Just with regard to getting production stabilized in Ocala, you had originally talked about just you need a stable platform to work from so they can start improving things. But you need to, first of all, be able to kind of predict just the number of units that you can get out on a daily and monthly basis. Do you feel like you're there, at least at that base level of predictability yet?

No, We're not there yet. But I would say we're perhaps 70 percent there. And what we've been trying to do, if you look back over the past years of this business, the operating mode that we were in is the guys would just do extraordinary things to get trucks out the last week of the month, or more specifically the last week of the quarter, in order to try to make their results. And so the following week then nothing got finished because the line was dry. So what we've really focused on doing is starting a certain number of trucks every week and finishing a certain number every week, and doing everything that we have to do in order to ensure that that is happening. And we've taken out a considerable amount of the fluctuation during the third quarter.

Having said that, we still do have the kinds of disruptions that I've talked about in the past. We haven't gotten rid of all those. We've gotten rid of a number of them. But I'm satisfied with the progress that we were able to make. We should be able to continue that in December and going forward. But until we get the product fully defined and structured so that our bills and materials are accurate and our work instructions are complete we still will have these disruptions from time to time. But as long as we eliminate the most pervasive reasons 1 by 1 then this will continue to get better. So we won't to get to 100 percent. You're never satisfied with where you are, but I'm satisfied that we've made a good first stab at it.

Are you still located down there?

No, Marc Gustafson started 3 weeks ago and I came back to Chicago. Interestingly enough, Marc was working on these same problems at his previous employer. So that was 1 of the nice things about us being able to get him, is that the significant learning curve that you have in regard to how this business runs, how the industry runs. He was able to hit the ground without going through a big shock about how things operate in the fire industry.

Very good. Thank you.

Jack Kelly, Goldman Sachs.

A couple questions. Can you just go back to the accounting change that you had made? You mentioned it was going to a $1 million negative impact in Fire Rescue in the fourth quarter. Does that just get annualized roughly then in '05? In other words, it could be as much as a $4 million charge? And also, if you could just clarify exactly what was done there. From what you said it sounded like before delivery became effective when it went out the door of your factory, and then it went into the dealer's hands or the customer's hands, and then there were warranty issues. And I'm not sure exactly what you're doing -- what the new -- if that was a definition of the old way of doing it, what's the new way?

Let me start on that 1. It's not an accounting change; it's a change in the selling terms that we have with our dealers. What we have done for sometime is we have had the sales contracts with them where the risk of loss and the title transferred when we complete the truck, and not necessarily when it moves off-site. And what has happened is that everyone has been quite focused on getting the completion done, as opposed to necessarily getting it to the hands of the customer, making sure the customer is happy and the cash is collected.

We think part of it, there have then been some potential changes that occur after the truck is complete which are hard to capture and hard to bill for. So we think this will streamline the process, and will get everyone very focused on what the objective is, and get the product to our customers as quickly as we can.

This should be a onetime impact only. And it will occur as we convert those dealer agreements over at end of this quarter.

Why wouldn't it extend into '05, though, because if it's essentially delaying delivery, if that's the right word, why wouldn't that persist next year too until you anniversary this?

Eventually all the trucks get delivered. What it does is really introduce a onetime lag.

Secondly, Bob, on environmental you had mentioned you're doing well with the exception of refuse. Can you give us some metrics on how you define well ex-refuse.

Yes, a little. We don't disclose the results of our individual business units. But I can say that except for refuse that all of our other business units in Environmental Products this year are having improved performance and I think without exception have improved margins over last year. So I think that gives you an indication that all of the bad news is roped off into the corner of refuse.

Then on dealers you had mentioned -- aside from what we just discussed in terms of the change, it sounded like there's some dealers that maybe you weren't satisfied with what was going on. Were there any dealers that left in the last quarter or 2 or that you have added both for the fire and refuse?

In refuse, no. There have been any added or subtracted all year long. In fire in the last quarter we haven't had any leave. We did have 1 in the previous quarter, in the second quarter of last year.

We've been looking -- our dealers are really a vital part of both of these businesses. But in regard to fire, the follow-up service and the repair of fire trucks is obviously very critical to the performance of the fire department. So having these dealer partners is absolutely vital to our business. And the stronger they are, then the better we do as well. So over the last couple of years we've had people that have been looking at our dealer body, looking at those that are doing very well and those that are not doing so well, and trying to either through some additional training or guidance, or in some cases changing out, we've been working to build up our dealer body. So there's only been the 1 that I'm aware of that was I guess a voluntary departure from us.

So either on the fire or refuse you don't see any need to dramatically change the configuration of the dealer network?

No. All of them hopefully can improve. Just as we're trying to improve our business, we want them to improve theirs. But at this point we don't have any that we're to the point of being dissatisfied with that we want to invite them to leave.

Finally, on the reduction in orders from the 1 industrial customer, versus what you would have thought 3 or 6 months ago, are you losing more share of that particular contract? Or is this just what you had anticipated in the beginning?

No, this is what we anticipated. In fact, if you look at our volume, what we had indicated early in the year is that we had hoped that through additional sales through our dealer body that we would more than make up for what we lost in this large commercial customer. We have offset about 75 percent of the loss, and so we're doing very well. Our dealer body, the sales through our dealer channel, are up very, very nicely over previous year.

Thank you.

, KeyBank Capital Markets.

The question I have, I guess referring back to Jack Kelly's question, is can you tell us what sweeper orders looked like during the quarter?

I can. I don't mind. We tend to break it down by market. So our sweeper orders in our municipal market were up very nicely from both last year and sequentially.

So up double digits?

Yes. On the industrial side we were up, I would say, 10 percent from this time last year and up again nicely sequentially.

Stephanie, do you have a view of what the tax rate may look like for 2005?

We're still working on that with all the changes, but I would say mid-to-upper-20s.

Thank you.

I'm showing no further questions at this time. Mr. Welding, I would now like to turn the conference back to you.

Thanks, Michelle, and thanks for doing a very nice job of managing the conference. I'd like to thank all of our participants in particular for your interest in Federal Signal and for your interest in our progress. We expect that this will be the low point in our transformation and we look forward to our next call in December and giving you some view into what we see ahead in 2005. So thanks and have a very good day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.